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Affordable housing is the flavour of the season

The contribution of mortgages to the banking industry’s advances has grown from 1.5% to 10% in the past decade, as most bankers see opportunities in the market.

What do Anshu Jain, Jaspal Bindra, Gunit Chadha and Pramod Bhasin have in common? They are all global bankers from India. Right? Yes, they have all been high-profile bankers and now they want to dabble in the affordable housing loans segment.

And, they are not alone. Essel Group’s Subhash Chandra; former managing director and CEO of Sriram Capital Ltd R. Sridhar; Shantanu Mitra, who had managed consumer banking and risk at Citibank and Standard Chartered Bank in the past; Rakhee Kapoor Tandon, daughter of Rana Kapoor of Yes Bank Ltd; and many more either already have one foot in this space or are knocking on the doors.

There are at least 17 new entrants in the affordable housing space even as 14 existing lenders are significantly expanding their portfolios of low-cost home loans by broadening their distribution channels through direct sales and community-based loans. The Indian home loan market consists of 76 housing finance companies and state-owned as well as private banks and all have started using technology to reach out to the lower end of the customer segment. There has also been a rate war to woo the customers.

Axis Bank Ltd, which has a little over Rs60,000 crore mortgage portfolio, disburses around Rs2,000 crore home loans every month; out of this, Rs150 crore flows into affordable housing through its Asha home loan product for first-time buyers. Similarly, Dewan Housing Finance Corp Ltd, with a portfolio of around Rs62,000 crore, disburses Rs1,700 crore every month , Rs300 crore of this goes for relatively low-cost housing. The story is similar with DCB Bank Ltd, Yes Bank, PNB Housing Finance Ltd, and most others who have been in the business of home loans.

A burgeoning middle class, rising disposable incomes and fiscal incentives on home loans have increased the affordability of homes in Asia’s third-largest and the world’s fastest growing major economy. The average age of a new home buyer in India is now 32 years, down from early 40s, a decade ago.

Even though the little over Rs10 trillion Indian mortgage market has been growing at around 18-19% every year, its size is too small in relation to the economy—around 8% of the GDP, less than half of what it is in China. Singapore’s mortgage market is 32% of its GDP, lower than Hong Kong’s 41%, and in the US and the UK, it is 81% and 88% of GDP, respectively. In Denmark, the southernmost and smallest of the Nordic countries, the mortgage market is 104% of GDP.

Most bankers are seeing opportunities in the market. This is reflected in the fact that the contribution of mortgages to the banking industry’s advances has grown from 1.5% to 10% in the past decade. At this rate, the mortgage to GDP ratio is expected to rise to 20% by 2020, according to an estimate by consulting firm BCG.

Many are betting big on this segment because the opportunities are enormous with a shortage of close to 19 million units in urban India and around 40 million in rural pockets. The housing finance companies are increasingly focussing on the middle class and aspiring lower middle class segments with average annual income of Rs1.5 lakh to Rs10 lakh. Within this segment, the emphasis is on small and medium entrepreneurs and self-employed individuals and professionals.

Most of the new entrants and the aspiring mortgage lenders are operating from Mumbai and Delhi and a few from Bengaluru and Haryana. From there, they are keeping a hawk eye on eight Indian states that have 80% share of the shortage of housing in urban pockets— Madhya Pradesh, Rajasthan, Bihar, Tamil Nadu, Andhra Pradesh, West Bengal, Maharashtra and Uttar Pradesh.

They are reaching out to the developers who have been constructing affordable smaller format (one room plus kitchen) dwellings, costing less than Rs6 lakh, as such units are sold faster than the larger formats (one/two bed-room plus kitchen and a hall). Gujarat, Maharashtra and Madhya Pradesh have been doing better than other states in selling such units even as the supply is limited in north India. The southern region is the least attractive market because of longer time taken for various approvals and the cultural resistance of people to move to flats in multistoried buildings. In eastern India, developers have been active in Kolkata and Bhubaneswar.

A look at Vastu Housing Finance Corp. Ltd, a new entrant, gives us a sense of the opportunities. The nine-month-old company, with focus on Maharashtra, Karnataka, Madya Pradesh, Gujarat and Rajasthan, has acquired 850 customers and built a loan book of Rs100 crore.

While the government push and the initiatives of the high-profile bankers are giving a leg up to the affordable housing segment, the recent clamp down on cash economy will force affordable housing financiers to take a relook at their business model. Many of their customers are not in the income tax bracket and they earn their salary and wages in cash. Till now, while assessing their repayment capacity, these firms were taking into account the customers’ official income as well as the surrogate income but now they would need to overall the risk assessment process since the surrogate income, in cash, may dwindle.

I understand that the so-called bounce rate in the low-cost housing market in December has risen following the demonetization move. The bounce rate refers to the incidence of post-dated cheques meant for paying monthly loan instalment bouncing or an instruction given for fund transfer electronically at a specified date not being honoured because of lack of funds. Many businesses across India such as diamonds and textiles in Surat, handicrafts and brass industries in Moradabad and gold jewellery manufacturing in Kerala have been fully or partially shut and the workers are not being paid. Naturally, they do not have funds to pay the monthly instalment for their home loans. The industry is confident that the pain is short term and in the longer run, the drive for a cashless economy will have a positive impact through transparency and correction in prices.

Body blow to LAP

Indeed, in the medium and long run, the opportunities will increase in this space but one casualty of the clamp down on cash will probably be a product called loan against property or LAP. While home loans are the safest bet for the bankers as they are backed by securities, LAP is the equivalent of home-equity loans internationally. For many large and established players, particularly the non-bank entities, it is a growth-driving profitable product. LAP could be more than 50% of the total mortgage book of a few.

LAP, a secured loan, takes a residential or a commercial property as collateral and typically, self-employed individuals and professionals are LAP customers. Such loans support business expansion and diversification and even meet working capital needs. They are also used for weddings, education, medical exigencies, repayment of previous loans and debt consolidation. Small and medium entrepreneurs are big buyers of LAP and as their transactions are mostly in cash, they are being hit the hardest. As a product, LAP will find it difficult to grow.